The dollar is in the spotlight this week as key inflation data could signal the Fed is beginning the early stages of a pivot.
The dollar is starting the week on the back foot after its first weekly loss in a month against a basket of 6 other major currencies. The downside momentum can be attributed to investors seeing recent signs of easing inflation, leading to increased risk tolerance, benefiting other currencies as well as stocks and commodities.
However, key data is out of sight as August CPI numbers are due this week, and if there is a significantly softer inflation print, the dollar could continue to sell off as the market awaits the Fed’s next move on interest rate decisions and any sign that how soon could a dovish pivot start.
Technical Analysis (H4)
Regarding the market structure, the price moved correctively towards 110.65 level in the form of an ascending channel that formed a minor trend reversal pattern. Since then, the price has impulsively moved from the high towards the 107.79 an area where there is significant buy-side liquidity. As for the main trend, it will remain bullish until the key 104.00 the level is broken by bears.
The euro starts the week on top as demand for dollars falls sharply. Contributing factors are increased risk sentiment in the market as well as continued rhetoric coming from the ECB. Executive Board member Frank Elderson’s weekend remarks hinted that the bank looks increasingly likely to follow the Fed in its hawkish stance on raising interest rates again in October, amid the risk of a recession and historically high energy prices, to bring inflation back to an acceptable level level.
Regarding the market structure, the price moved correctively towards 0.986 level in the form of a descending channel that formed a minor trend reversal pattern. Since then, the price has impulsively moved from the low towards the 1,019 an area where there is significant selling liquidity. The trend will remain bearish until the key 1.037 the level is broken by bulls.
Sterling starts the week on a firm footing amid heightened dollar selling bias in the market, hitting a two-week high after moving off a low last seen in 1985. Most of the momentum seen in the pound is a direct result of the market already anticipating the Fed’s next meeting this month the possibility of a 75 basis point rate hike and the effect this has on risk sentiment can be seen in relation to how other currencies and stocks across the board have rallied.
However, the gains made by Sterling could be limited by the still subdued outlook for the UK economy, with disappointing economic data released today in 0.2% growth versus 0.5% that was expected. Further upside potential will increasingly be tied to dollar momentum as we head into the week of US inflation data.
Technical Analysis (H4)
In terms of market structure, the price moved towards 1,140 area in the correction wave, forming a reversal pattern (falling wedge) of the secondary trend. Since reaching the low, the price has impulsively moved towards the 1.167 and is now trading at a level where significant sell-side liquidity could enter the market. As for the main trend, the price is still in a technical downtrend and this move could potentially represent a correction to form a new lower-high trend until the bulls break 1,186 area impulsively.
Gold heads into a new week with investors closely watching August inflation data due out on Tuesday. Any significant move away from the yellow metal will be intrinsically linked to how soft the inflation data is, as this will affect the likelihood of a 75 vs. 50 basis point rate hike from the Fed at their next meeting this month. A 75 basis point increase is likely to keep gold in the south, but a 50 basis point increase could be the catalyst for the start of a recovery and a sustained return to levels on the north side of the current price.
Technical Analysis (H4)
In terms of market structure, the current price action has printed a rising wedge correction pattern with a top placed at $1,729 level. A significant break above this area could give the bulls a price to attack $1,741 flat. Conversely, failure to break this corrective pattern would result in bears taking control of the price and triggering a subsequent impulsive wave that could challenge $1,681 flat.
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